Looking for Optimism May 26, 2020 Weekly Update Print Please note: This update was prepared on Friday, May 22, 2020, before the market’s close. News of a potential vaccine for COVID-19 started the trading week off with a bang—the Dow rose nearly 1,000 points (3.9%) on Monday. A day later, scientists’ skepticism over the trial results put a damper on the rally. Breaking away from the pandemic headlines, renewed tensions between the U.S. and China tempered traders’ excitement as the week drew to a close. Through Thursday, the Dow Jones Industrial Average and the broader S&P 500 were down 13.4% and 8.0% for the year, respectively. Foreign stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company., as measured by the MSCI EAFE benchmark, are down 17.7%. As of Thursday, the yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. on the Bloomberg Barclays U.S. Aggregate BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. index had risen to 1.38%, down from 2.31% at the end of 2019. On a total return basis, the U.S. bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market has gained 5.2% for the year. The Data Is Bad, But Getting Better How to sum up the current economic situation in a single sentence? “Bad, but getting better.” You can see this pattern in a wide range of economic data. For instance, another 2.4 million people filed for unemployment last week. That’s a devastating number, more than 10 times what it was in mid-March—but it’s a huge improvement from prior weeks. Bad, but getting better. A preliminary measure of expected economic activity from Markit, which surveys the managers who do the buying for businesses large and small, came in at 36.4, well below the measure of 50 that signals contraction. Terrible on its face, but a 33% rise from the prior reading of 27.4. So, bad, but getting better. The pattern holds when we look at stats on behavior. More people are eating out than were a few weeks ago. Mobility data tells us people are venturing away from home more often than they were just a few weeks ago. And larger numbers of people are flying of late than were a few weeks ago. Yes, we are coming off very depressed levels and activity is still woefully slow. So it’s bad, but getting better. To share the numbers behind just one of these stats: Over the last seven days, an average of about 230,000 people have gone through TSA checkpoints. That’s doubled from a month ago, when just 100,000 people were flying—so, better. But it doesn’t look great when compared to a year ago, when 2.4 million people were flying every day—a 90% drop in travelers. As noted, things are bad, but also getting better. Many investors are confused by the fact that the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market is rising while the economic data paints a painful picture of recession, a question we tackle in a podcast this week. Part of the answer is the monetary and fiscal support provided by the Federal Reserve and Congress. Another part of the explanation is that investors always look ahead. StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. prices are based on what they think will happen in the future, not what’s happened in the past. As such, investors and traders may be focused on the improvements in the data over the past few weeks, even if the numbers are still poor in absolute terms. Yes, things are bad. And yes, a resurgence of the virus could derail the recovery. But, for the time being, things are moving in the right direction. Hopes, Not Facts, Spark Rallies Monday’s strong stock surge came in part courtesy of comments on “60 Minutes” on Sunday night from Federal Reserve Chair Jerome Powell about the probability for recovery. His shot heard round the investment world: “You wouldn’t want to bet against the American economy.” We agree—when it comes to the broader economy. But certain sectors within it and companies within each sector have greater and lesser prospects for recovery. Powell didn’t suggest that it would be clear sailing from here on out—there are more hardships and surprises in store—but his confidence about being able to temper tough times and provide a path to better ones reassured Wall Street and Main Street. It’s not unusual to see traders react to words from the head of the Fed, but seeing the stock market rally on a single early drug-test result (as mentioned earlier) suggests that traders are still buying and selling on hopes and fears, not facts. We believe that leadership matters, but facts and actions will matter more. We continue to wait for more data to come in before declaring the economy out of the woods or volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. out of the markets. Special Podcast: Why Are Markets Rising in a Recession? The COVID-19-related economic decline is undeniable. We’ve seen unprecedented unemployment, record drops in consumer spending and rampant speculation that many businesses and jobs aren’t going to survive the pandemic’s economic shock. Yet stock prices have gone higher and higher: What gives? In this special episode of The Adviser You Can Talk To Podcast, Adviser Investments Chairman Dan Wiener and Chief Investment Officer Jim Lowell dig into the disconnect between economic data and recent stock market gains. Are traders and stock-pickers buying on expectations of improved earnings in 2021? 2022? How far ahead should investors be looking when it comes to stock prices? In this informative and insightful discussion, Dan and Jim cover: The stock market as a discounting mechanism that reflects expectations for the future Hopeful signs in the economic and medical data Sector rebounds to believe in and how long others may lag What does recovery look like? While we’d never turn down stock market gains, Dan and Jim talk about why they remain cautious amid this rapid recovery from March’s lows. For their instructive outlook on today’s markets, click here to listen now! As events continue to unfold, we’ll be updating our podcast and blog page regularly to keep you informed on the latest developments and our response. ***** Financial Planning Focus: Tax Benefits to Pandemic-Related Giving Many of us are searching for ways, even small ones, to help those on the front lines of the crisis. What you may not know is that the federal government—as part of the multi-trillion-dollar virus relief bill, the CARES Act—tweaked certain rules to encourage giving to COVID-19-related causes and non-profits impacted by the pandemic. Here’s a brief rundown of the major changes in the bill related to charitable giving. As of this writing, all of these changes are only applicable to the 2020 tax year. Higher Cash Donation Limits. If you can give big, you’ll be able to deduct more of your contributions than usual. Typically, in a given year, you can only deduct up to 60% of your adjusted gross income for cash contributions. (Donations in excess of that percentage are allowed to be carried forward for a period of five years.) In 2020, though, there is no limit to the percentage of your income you can deduct for cash contributions. This means you can deduct 100% of your adjusted gross income.One important caveat: This 100% allowance does not carry over to any contributions made to a donor-advised fund. Raised Cap on Corporate Giving. The CARES Act pushes the limit on cash contributions made by corporations from 10% to 25% of their taxable income. New Deduction for Non-Itemizers. The 2017 tax reform bill increased the size of the standard tax deduction, leading many taxpayers to stop itemizing their charitable contributions. But the CARES Act allows you to take a deduction up to $300 for a gift to a qualified charitable organization, even if you do not otherwise itemize your giving. One thing that hasn’t changed in the CARES Act? Qualified Charitable Distributions (QCD). The QCD has been a popular giving strategy in recent years. It allows eligible taxpayers who are age 70½ or older to donate up to $100,000 from an IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. directly to a charity, bypassing any taxable income on their tax return. If you have any questions about how these charitable giving strategies might affect you and your financial plan, contact your wealth management team. We are happy to assist. ***** Adviser Investments’ Market Takeaways Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’ve begun providing Today’s Market Takeaways, short videos in which a member of our investment team analyzes what the market’s telling us. We also posted two new Market Takeaways videos this week, featuring EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Research Analyst Kate Austin on the likelihood of further virus relief from Congress and Vice President Steve Johnson on how to keep a broader perspective on your portfolio in these tumultuous times. Looking Ahead A holiday-shortened week lies ahead. Still, we’ll see a plethora of data, including the Chicago Fed national activity index, new home sales, home prices, the Fed’s “Beige Book” of anecdotal evidence of nationwide economic activity, a revision to first-quarter GDP, durable goods orders, jobless claims, personal income, spending and savings, consumer confidence and consumer sentiment reads. As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future. About Adviser Investments Adviser Investments is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have more than 3,500 clients across the country and over $7 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868. Please note: This update was prepared on Friday, May 22, 2020, before the market’s close. This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs. Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them. Third-party publications referenced in this article (e.g. CityWire, Barron’s, InvestmentNews, CNBC, etc.) are independent of Adviser Investments. Readers should note, that to the extent any third-party publication linked to in this piece also contains reference to any of the newsletters written by Dan Wiener or Jim Lowell, such references only pertain to the respective newsletter(s) and are not reflective of Adviser Investments’ investment recommendations or portfolio performance. Newsletters are operated independently of Adviser Investments. 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